Paris emerges as a new financial (regulatory) center

The news is now out that the Post-Brexit home of the European Banking Authority will now be Paris, instead of London. The process, from almost all accounts, was one not entirely inspiring confidence. From the FT:

Paris and Amsterdam have been chosen as the new homes for two prized EU agencies, after ministers in Brussels resorted to picking names from a hat to decide where the two organisations and combined 1,000 staff should move after Brexit. Three rounds of voting in Brussels failed to produce a clear winner in the contests to relocate the European Banking Authority and the far larger European Medicines Agency, which are both currently based in London.

Still, what’s done is done, and the relocation of the agency changes the political economy of Europe. In all, the decision is not just about the decline of London as a voice in financial regulatory policy, but it also highlights the emergence of Paris as a key financial regulatory center.

In short, financial regulatory policy will now arise principally in three key cities. First, EU technical standards for the European Securities Markets Authority and the European Banking Authority, arguably the two most important regulatory agencies (the third being EIOPA), will be devised in Paris. Brussels, meanwhile, will have a definitive voice over the acceptance or rejection of the advice offered by the agencies in the standard-setting process. Finally, the ECB will undertake supervision of the largest and most systemically important financial institutions in Frankfurt (within the eurozone).

Commentators have long pondered whether or not the location of federal agencies matters, beyond the obvious economic benefits for the host city. Clearly, history indicates that decision-makers have had much more than financial rewards in mind. The location of the European Central Bank in Frankfurt, which was enshrined in the Treaty of Amsterdam, was largely interpreted as a requirement for Germany’s succession to the euro, in the belief that it was necessary that the new institution being close proximity to the Bundesbank in order to absorb its culture, priorities, and risk appetite. Similarly, the EBA was housed in London, in part to help assuage London’s concern that EU banking regulations would interfere with its capital markets culture.

Indeed, the fact that location has always been deemed to be important in informing the culture of institutions suggests that yesterday’s deliberations may not have been quite as random as many may have presumed. Frankfurt was always assumed to be a leading candidate. However, if the European Banking Authority was to relocate there, Germany, which already wields overwhelming influence given the size of its population and economy, would come to secure a dominant position in not only economic but also major financial regulatory matters. In retrospect, perhaps, it should be of little wonder that it was eliminated early on in the voting process. For the moment, I’m left to surmise that although it may not have been entirely deliberate that Paris would emerge as the EBA’s host city, it was intentional that Frankfurt would not.